Who Is Right Between Oil And Other Commodities: One Hedge Fund’s Opinion
By Tyler Durden
From Francesco Filia of Fasanara Capital
So far in May, base metals and Oil decoupled markedly (chart attached below). While the Oil price kept rising and moved closer to 50$, base metals fell off a cliff and descended below March lows.
We believe that Oil is the errant outlier, helped by deep but temporary supply outages in Canada and Nigeria and all-time record speculative flows, and is more likely to catch down to other commodities going forward rather than the other way round. We look at Oil gyrations as short-term heavy volatility, within a long-term downward trend.
- Supply disruptions in Canada and Nigeria held back 2mn b/d. Temporarily.
- Speculation runs at record levels: NYMEX Crude Oil Non-Commercial Long Contracts at all-time highs (chart below)
On the other hand, weakness in commodities is consistent with fundamentals:
- Weak aggregate demand (likely to stay shallow in the foreseeable future) vis-a-vis chronic global over-supply,
- China inability to keep expanding credit at current pace and keep creating an illusion of demand the world over (1trn$ or 10% of GDP per quarter is unsustainable),
- A stronger US Dollar, and the unease of the FED to talk it down, as current account deficit shrinks and only small hikes are priced in
As such, at present, we find the price action so far in May to come in confirmation of our underlying thesis, thus expect more weakness in commodities from here, and Oil to eventually give in.
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Extract from our latest Outlook
Investment Outlook 3rd May attached here
1. Strong US Dollar Factor:
The weak Dollar is the major factor propelling the reflation sentiment in the market – EMs and Commodities greeted it with enthusiasm. However, it seems to us more a story of appreciating Yen and Eur out of the failed attempts by the Boj and the ECB to reflate their economies, as markets doubt their capacity at negative rates. It is not the typical weak Dollar out of increasing US current account deficit and increasing spending / imports, positive for the world and inflation. We expect the USD to have another leg up in the months ahead. A stronger Dollar alone has the potential to revive January-type fears over Oil, CNH, EMs, leading to a risk off of global assets, including the S&P. We see drivers of USD strength as follows:
a. The FED took the steam off the Dollar by moving its expected path of tightening in 2016 from 4 hikes to 2 hikes only. The FED may become more dovish than that, but the market already discounts that. Of the 2 rate hikes planned, a tiny 20% is priced in at present. Not much headwind for the USD is left from FED’s communication. At the other end of the equation, after recent fails, the BoJ first and then the ECB will go back at it, trying again to reflate their stagnant economies, with the debasement of JPY and EUR either a working tool or a side effect.
b. …read more
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